Beside the Thames, on the reclaimed site of an old power station in east London, plans are well advanced for the first phase of a small new town that will eventually provide almost 11,000 homes, plus shops, health and leisure centres and up to five new schools. Next year, in the once unglamorous setting of Barking Reach - rebranded Barking Riverside - work will start on the first wave of badly needed affordable housing, with a mix of tenures to address the new reality of a deeply depressed property market.

With housebuilding at the lowest level since records began, fuelled by a credit crunch-induced mortgage squeeze alongside rising repossessions and growing waiting lists for social housing, it is difficult to overstate the current crisis. Construction companies are abandoning hundreds of sites nationwide in a desperate attempt to boost balance sheets as profits plunge and land values plummet by more than 50% in some areas.

But amid the gloom, innovative solutions to revive the flagging market are emerging. These involve local and national government, and their agencies, buying empty properties and, where necessary, acquiring cut-price land for development - in short, intervening in a way that would have been unthinkable a year ago.

Barking Riverside may provide one way forward. While the 150-hectare development was conceived in a booming property market earlier this decade, its outline provides the new Homes and Communities Agency (HCA) in England - which begins work next month - with a public/private partnership model to kickstart building.

Key to the Barking development is a joint venture company, embracing the national regeneration agency English Partnerships - which is merging with the Housing Corporation, another quango, to form the HCA - and developer Bellway, Britain's fourth largest house-builder. Four years ago, EP took a 49%, £16m stake in the joint company to drive development forward by reclaiming the toxic "brownfield" site. The expectation was that much of its investment would, at the very least, be recouped over the next 20 years.

Now the HCA, which will start with an annual budget of more than £5bn - although this could well rise if the government brings forward future spending allocations - could soon be casting its eyes on other sites with planning permission around the country, some of them greenfield, where development has stalled because builders have run out of cash. On some sites, work has stopped midway through construction, while in city centres the locked gates outside seemingly abandoned projects provide a graphic illustration of the credit crunch.

Building public investment

Robert Napier, the HCA chairman, is in no doubt that his agency has to acquire land when it is relatively cheap. But there is a caveat. "It must be done in a way that provides a good investment for the public," he insists.

In the current global financial turmoil, with builders laying off workers in the face of mounting losses, several options are being considered by the HCA: for example, buying suitable sites from developers and then contracting them to complete a project; or forming joint ventures such as Barking, that involve the HCA directly taking a stake - which would vary according to a developer's balance sheet - in sites; or investing directly in housing associations, rather than simply dishing out grants to them.

In this way, builders and housing associations will get the necessary cashflow either to start or complete schemes, while allowing the HCA to share in any future profit, which could eventually be ploughed into other projects. At the same time, the agency would be in a position to insist on good design and high carbon-efficiency standards.

Here again, Barking Riverside might be a model. Stephen Oakes, English Partnerships' regional director for London and the Thames Gateway corridor, in which Barking is a key project, says the business plan envisages some profit emerging for the public purse after 20 years. And Oakes thinks the project has attractions elsewhere. He says: "The public sector can step up and say, 'We are willing to take a much longer view on this.' We have to persuade the housebuilders that there is a profit, but not a fast-buck return. We are also in a position to insist on high standards."

What is clear is that builders are willing to do deals. The House Builders Federation says: "A lot are looking at selling land because they need to put money back into the business." On the back of this, others are keen to take advantage of what appears to some as a fire sale of land. Housing associations, which class themselves as social businesses and are partly funded by the Housing Corporation, are increasingly big players in the market - delivering more homes in London than private builders. While some are feeling the pinch, and might have to be bailed out through mergers, most are having to drastically curb or halt developments because projected income from house sales - on which associations increasingly depend to cross-subsidise social housing - has dried up.

But David Montague, chief executive of London and Quadrant, one of the country's largest associations, says many balance sheets are still strong compared with private builders. "We are in the market for land," he says. "It makes much more sense [for either the HCA, or local councils] to partner associations with a strong track record to break the current three-way stand-off between lenders who won't lend, buyers who won't buy, and builders who won't build."

Unless quick action is taken - and many are taking comfort from the commitment by the chancellor, Alistair Darling, to boost spending on housing - the next financial year will see housebuilding levels plunge further. Social and affordable housing could be badly hit.

David Orr, chief executive of the National Housing Federation, which represents associations, speaks ominously of a worst-case scenario in which there is "zero growth" because associations cannot cross-subsidise social housing. But he is cautiously optimistic of a gradual upturn, guided by the HCA. He says: "They will have a much broader range of interventions than the Housing Corporation [which funds and regulates social and affordable housing], such as equity investments, sharing the risk, and thus allowing developments to go ahead."

Use of unsold homes

Around the country, other measures are under way to boost housing supply. Last week, under a £200m initiative announced five months ago by Gordon Brown to buy up unsold homes for social housing, one developer received £13m of public money for 335 of its vacant properties across 19 sites in England. These will be managed by a housing association. And in Shropshire, the county council - which will shortly morph into an all-purpose unitary authority, absorbing five districts - has reached agreement to use some of the £60m held in reserve by the districts to buy up unsold homes. But bigger deals might be on the horizon in the county, such as forming joint ventures with developers to buy land for building or finish partly completed projects that have ground to a halt.

Nationally, however, much depends on the willingness of the government to pool housing spending - currently spread across a raft of Whitehall programmes - into a common pot so that the new Homes and Communities Agency can begin with a bang, rather than a whimper.